Market Summary
The November 21st Couch Potato Market Summary mentioned "... The best bet at this point is range-bound trading for the next few weeks. Senior traders usually are on vacation during thanksgiving week and the junior varsity is working the trading desks... The recent price pullback should be considered a bullish sign because it gave the market the opportunity to absorb overbought conditions. Anything can happen but we probably won't get a reliable sign on market sentiment until the big boys return to work after the holiday..." As indicated in the stock charts below prices did indeed trade range-bound. Stock prices gapped up and down daily, but still stayed within the recent trading range. The charts also suggest that from a technical perspective market direction is near-term neutral. Of course market sentiment can change in a heartbeat, especially considering that senior traders return to work on Monday. The big boys will let us know whether after gorging during thanksgiving week, they are in the mood to maintain a trading range, push prices higher, or start a new bearish trend.

SPY ETF Trade Setup
We are opening a December expiration month SPY Bull Put spread
SPY closed at $118.80 on Friday (22 days to December expiration)
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is trading ABOVE its 50-day simple moving average (see SPY chart)
SPY is ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)

30 day Historical Volatility is 13.60%, Implied Volatility is 19.28% both numbers are near the bottom of their 52-week range – which is considered a bullish sign
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.

We want the SPY Bull Put short strike to be below defined support levels :
$118 calculated based on previous intraday lows and technical support levels
$113 equals the lower price level of our 80% statistical probability range
$117 is the lower level of the Bollinger Band – lower solid purple line in the SPY chart below

We want the SPY put spread to generate a minimum .50 net credit AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the December expiration option series Bull Put Spread (based on Friday's closing prices). The recommendation is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

Premium Credit $.51
Total Option Premium Received $510 (Excludes commissions and fees)
Maximum Risk $4,490
Margin Requirement $5,000
10 contracts traded (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

IWM ETF Trade Setup
We are opening a December expiration month IWM Bear Call spread
IWM closed at $73.22 on Friday (22 days to December expiration)
IWM is priced ABOVE its current 14-day EMA (see IWM chart down below)
IWM is ABOVE its 20-day Bollinger Band SMA (see IWM chart)
IWM is trading ABOVE its 50-day simple moving average (see IWM chart)
IWM is ABOVE its 200-day simple moving average (see IWM chart)
Relative Strength Indicator (RSI) is neutral (See IWM chart)
Moving Average Convergence/Divergence (MACD) is neutral (See IWM chart)

30 day Historical Volatility is 18.30%, Implied Volatility is 24.91% both numbers are near the bottom of their 52-week range – which is considered a bullish sign
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.

We want the IWM Bear Call short strike to be above defined resistance levels :
$74 calculated based on previous intraday highs and technical resistance levels
$76 equals the upper price level of our 80% statistical probability range
$75 is the upper level of the Bollinger Band – lower solid purple line in the IWM chart below

We want the IWM call spread to generate a minimum .50 net credit AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the December expiration option series Bear Call Spread (based on Friday's closing prices). The recommendation is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

Premium Credit $.56
Total Option Premium Received $560 (Excludes commissions and fees)
Maximum Risk $4,440
Margin Requirement $5,000
10 contracts traded (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

Exit Plan
The rules for exiting the SPY and IWM credit spreads are:

Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.

If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.

Final Comment
Twice in the past few weeks the Couch Potato published a setup for a December SPY put spread. On both occasions stock prices gapped up the next morning and the trades were not available (based on our trade criteria). Volume has been below normal due to the holiday week and this contributed the increased volatility with opening gaps up and down from one day to the next. Obviously the recent intra-day stock price activity is better suited for day traders. Traders return to their trading desk on Monday and it is reasonable to expect a little more price stability.

In addition to taking another shot at doing the SPY put spread we will attempt an IWM call spread. One or both of these trades should be available on Monday. If stock prices gap up the IWM call spread will be in play, the premium credit that we take in will be higher and/or you can do higher strike prices to maintain the same risk level. Conversely if prices gap down, then the trade will be the SPY put spread, with possibly more premium and/or lower strikes. And of course if prices fluctuate around the same level then we might be able to get both trades on the books.

Gregory Clay

Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.